Those executives who create value deserve their pay
Those executives who create value deserve their pay
In recent months, much headline space has been devoted to executive compensation. Clearly, there have been some excesses in that area. There are cases where there seems to be no relationship between the re wards given to those primarily responsible for corporate direction and the financial welfare of companies.
This is great stuff from a media point of view. And it may even have merit as an investment consideration. The most prominently discussed examples of executive compensation seem to fall into one of two cases. In the first case, executive compensation differs directionally from corporate performance. In the second case, executive compensation seems high when measured against any standard, regardless of how well the corporation is doing.
Ian Delaney is chairman and chief executive officer of Sherritt Inc., an Edmonton-based copper, natural gas and fertilizer producer with assets of $1.3 billion. Last year, Delaney earned about $328,000 in salary and benefits and received 150,000 stock options. He also holds unexercised Sherritt options worth $2.9 million. His views on executive pay:
There isn’t any justification for the first case.
Executive compensation should absolutely reflect corporate performance. The second case is more troubling because of the difficulty in precisely determining the appropriate returns or rewards for success. When we read of Michael Eisner of Disney receiving compensation valued at $260 million, one wonders if the company couldn’t have achieved the same result for $100 million or even $50 million.
Certainly more disclosure is better than less. We are discussing public companies, not private ones. When private owners of a business choose to seek investment funds from the public, they enter into a covenant of trust. One of the costs of “going public” is that investors have the right to examine all aspects of the business, of which one of the most important is who is going to lead the venture and what they get out of it.
The issue is complicated by the relative size of the company in question. It is unlikely that the same guidelines or policies could apply with equal effect, for example, to our large banks and an emerging resources company. The chief executive of a new, small company has more influence on the economic outcome of the venture than does Matthew Barrett, chairman of the Bank of Montreal. The bank’s performance in recent years has been very good, and it is entirely appropriate that Barrett’s compensation reflect that performance.
That compensation, however, should have less leverage in it than many much smaller companies. Matthew Barrett didn’t create the bank. The bank has been in existence for over 125 years and will undoubtedly survive his passing. The bank’s welfare is largely influenced by the economic conditions of the country. He is much more of an admiral than a cap-
tain. But he is very good at his job, and should be compensated as such.
One of the best ways to link executive performance to shareholder wealth is to try to ensure that executive compensation is taken in the same form as shareholder returns. This can be accomplished by granting options on shares, loans to executives to buy shares or other mechanisms that link executive pay to share ownership. But probably the best way to ensure that things remain in perspective is to ensure that the board of directors is composed in such a way that the board itself is sensitive to all classes of shareholders and can act independently. The balancing trick, of course, is that corporate welfare and strategy are often 1 the result of the involvement of a b very few people. Leadership is often seen to be the single most important determinant of corporate progress and it is a scarce commodity, subject to time and place and opportunity.
And that brings me to Lawrence Bloomberg. Lawrence recently set a new high-water mark in executive compensation and has suffered intense criticism as a result. His 1993 compensation of $6.9 million seems to have offended many observers. One of Canada’s less endearing qualities is our ability to deride success. We have developed the politics of envy to the highest degree. Consider: Lawrence comes from a modest background. He entered the investment business as a young man, working for a large investment dealer. He did well. About 13 years ago, he put together a small group of partners and established his own small business. In the intervening period, he has built that small firm into one of the largest independent investment dealers in the country. It has not been done without years of dedication, years of determination, years of aggression and years of competition.
The signs of Lawrence’s leadership are evident all over the firm. The returns to shareholders have been magnificent. He has taken the company into new market areas and pursued new products and services. He has assumed all of the risks an entrepreneur is supposed to accept. One of his rewards is public derision. Are we no longer prepared to let people win?
From both a public policy and public appreciation point of view, Lawrence would apparently have been better off to have won a governmentsponsored, tax-free lottery instead of spending the past 13 years building a business from scratch, employing hundreds of people, raising billions of dollars of investment capital for other companies and paying millions in income tax. I am sure that there are plenty of targets for journalists and other critics in corporate Canada. But I think it is unfortunate that Lawrence should be held up as anything other than an excellent model for other chief executives. □
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